Bulletin C-10-2

To: Whom It May Concern

Subject: De Minimis Exemption from the Mortgage Act for Individuals Engaged in Limited Seller Financing

Date: December 20, 2010

This Bulletin is intended to address the issue of individual seller financing as it relates to the Tennessee Residential Lending, Brokerage and Servicing Act1 ("Mortgage Act") and the Secure and Fair Enforcement for Mortgage Licensing Act of 20082 ("SAFE Act"). Specifically, this Bulletin addresses the Department's decision to exempt an individual, as seller of his or her own real property, who makes five (5) or fewer residential mortgage loans within any twelve (12) month period from all licensing requirements of the Mortgage Act and delay a determination of whether such an individual must be licensed until HUD publishes a final rule on the SAFE Act.

A primary objective of the Mortgage Act is to carry out the purposes of and to be compliant with the requirements of the federal SAFE Act.3 The SAFE Act provides that the U.S. Department of Housing and Urban Development ("HUD") must determine whether Tennessee's Mortgage Act complies with the minimum requirements of federal law. While states are charged with enacting licensing standards that meet the requirements of the SAFE Act, overall responsibility for interpretation, implementation and compliance with the SAFE Act rests with HUD. If HUD finds that Tennessee's Mortgage Act does not meet the minimum requirements of the SAFE Act, HUD must establish a regulatory regime to license and regulate individuals meeting the definition of a mortgage loan originator.

Tenn. Code Ann. § 45-13-301(a) provides that an individual, unless specifically exempted, shall not engage in the business of a mortgage loan originator with respect to any dwelling located in Tennessee without first obtaining a license.

Pursuant to Tenn. Code Ann. § 45-13-201(e), upon approval or consent by HUD, I am authorized to exempt in whole or in part from the Mortgage Act additional individuals or classes of individuals that I find inappropriate to include to effectuate the purposes of the Mortgage Act. To date, HUD, as the agency charged with the overall interpretation, implementation and enforcement of the SAFE Act, has not issued formal guidance or clarification regarding the scope of the SAFE Act's licensing requirements. In response to general inquiries involving "sellers of owner-financed dwellings," however, HUD has stated the following:

HUD recognizes-and the 5300 comments it received in response to its proposed rule reflect-that there are certain contexts in which HUD will need to issue clear direction in its final rule regarding the scope of coverage of individuals who must be licensed under the SAFE Act. HUD recognizes that state regulators making reasonable interpretations of the SAFE Act may find it prudent to delay determinations of whether certain individuals must be licensed until a final rule is published.4

I am of the opinion that this statement provides HUD's consent for me to exempt an individual, as seller of his or her own real property, who makes five (5) or fewer residential mortgage loans within any twelve (12) month period from the Mortgage Act and delay a determination of whether such an individual must be licensed until HUD publishes a final rule. HUD has previously stated that there are some limited contexts where offering or negotiating residential mortgage loan terms would not make an individual a mortgage loan originator under the SAFE Act. For example, "the provision in the definition that loan originators are individuals who take an 'application' implies a formality and context that is wholly absent where an individual offers or negotiates terms of a residential mortgage loan with his or her immediate family."5 In addition, HUD has acknowledged that "the commercial context implied by the taking of an 'application' is also absent where an individual seller provides financing to a buyer pursuant to the sale of the seller's own residence. The frequency with which a particular seller provides financing is so limited that HUD's view is that Congress did not intend to require such sellers to obtain loan originator licenses."6

Similar to HUD's reasoning for the aforementioned exemptions to the SAFE Act, it is the Department's position that the "formality and commercial context" implied by the SAFE Act's licensing requirements is absent where an individual does the rare and occasional seller financing. Accordingly, I find it appropriate to exempt an individual, as seller of his or her own real property, who makes five (5) or fewer residential mortgage loans within any twelve (12) month period from all licensing requirements of the Mortgage Act and delay a determination of whether these individuals must be licensed until HUD publishes a final rule on the SAFE Act.7

For the present time and subject to a final rule, regulation, interpretation, or formal guidance of the federal SAFE Act indicating otherwise from HUD, the Department considers an individual, as seller of his or her own real property, who makes five (5) or fewer residential mortgage loans within any twelve (12) month period exempt from the Mortgage Act. PLEASE TAKE NOTICE that, when and if HUD issues a final rule, regulation, interpretation, or formal guidance of the federal SAFE Act that is contrary to this position, the Department will have no alternative but to rescind its position and enforce said final rule, regulation, interpretation, or formal guidance. Thus, if HUD makes a determination that the Department's position is inconsistent with the federal SAFE Act, the Department reserves the right to withdraw its position in order to be consistent with federal law.

In sum, while it is the Department's current position that individuals making loans in accordance with the specifications outlined above do not fall within the scope of the Mortgage Act, the Department STRONGLY ENCOURAGES said individuals to be aware of the potential conflict with a final rule, regulation, interpretation, or formal guidance concerning the federal SAFE Act.

Please note that this exemption for limited seller financing is available only to individuals and is not applicable to business entities, i.e., sole proprietorships, limited liability companies, corporations, etc.

Any questions regarding this Bulletin may be directed to David Axford, Chief Administrator, Compliance Division, at (615) 253-2862 or Jera L. Bradshaw, Staff Attorney, at (615) 532-1028.